US: Student Loans In Crisis As Two In Five Likely To Default

Student loans are in crisis with two in five borrowers likely to default within five years, according to a new study.

Graduates owe around $1.4 trillion in student loans — the largest source of household debt after housing — but it is at an individual level that the extent of the looming meltdown becomes clear.

Analysis of recently-released data suggests that almost 40% of borrowers who entered college in 2004 may default on their student loans by 2023.

Students who enrolled in for-profit colleges were twice as likely to default within 12 years as those who entered public universities, while lower parental income and poorer job prospects mean default rates among black graduates are five times those of their white peers.

The study, carried out by the respected Brookings Institution, used newly-published U.S. Department of Education data to follow two cohorts of college entrants: those who began their studies in 1995-1996 and those who enrolled in 2003-2004.

While previous studies tend to examine the first few years of repayment, the aim was to provide a longer-term perspective on student debt by tracking borrowers over a 20-year period.

The analysis found that for the 1996 cohort, default rates continued to rise between 12 and 20 years after enrolment.

If the same pattern is observed for the 2004 cohort, almost 40% — or two in five — may default on their student loans by 2023.

Judith Scott-Clayton, non-resident senior fellow at Brookings and author of the study, said while the  default rate among the two cohorts may not follow the same pattern, signs that the later group are taking longer to default means their final default rate may be even higher.

The study also found the default rate among borrowers was about twice as high among those who enrolled at for-profit institutions as those who studied at public two-year universities (52% to 26%).

But because almost 90% of for-profit entrants borrow, compared with less than half of community college entrants, the default rate of for-profit entrants is almost four times that of community college entrants (48% to 13%).

The highest rate of default growth is among students who never complete a bachelor’s or associate’s degree. Almost one in four (24%) of college drop-outs default on their student loans, while 28% of those who complete a postsecondary certificate do so.

Defaults are also highest among those with smaller debts. More than a third (37%) of those who borrow between $1 and $6,125 default within 12 years, compared with almost a quarter (24%) of those who borrow more than $24,000.

But the study’s most sobering findings comes in the analysis of default rates among black students.

While high default rates are only seen among drop-outs and for-profit entrants in other demographic groups, this is not the case among black students.

Higher levels of borrowing among black students and lower levels of repayment mean that 12 years after graduation they own an average of $43,372 more than white students.

As a result, the default rate among black graduates is more than five times that of white graduates (21% compared with 4%) and is even higher than for white college drop-outs (18%).

The problem also appears to be getting worse: while 25% of black students entering college in 1996 defaulted, among 2004 entrants that figure was almost 38%. Projections for 2004 entrants suggest that as much as 70% of black borrowers may default by 2023.

Rather than concern at the overall levels of debt, Scott-Clayton argues that the study suggests efforts should focus on regulating for-profit colleges, improving degree attainment, promoting income-dependant loan repayment options, as well as addressing the challenges faced by black students.

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